The energy sector offers dividend investors lots of options. Some of the opportunities are rather unique. From ultra-high-yields to variable payments to income streams backed by sustainability, the energy sector provides many different ways for investors to generate income.
Devon Energy (DVN 0.19%), ConocoPhillips (COP 0.10%), and Brookfield Renewable (BEP 0.19%) (BEPC 0.09%) stand out to a few Fool.com contributors for their uniqueness. Here's why they think dividend investors should take a closer look at these interesting energy stocks.
Devon Energy pays big when energy is expensive
Reuben Gregg Brewer (Devon Energy): Before going any further, it's important to highlight that U.S. oil and natural gas producer Devon Energy is a terrible choice for investors who want consistent dividends. That's a simple statement to make because the board of directors has adopted a variable dividend policy that's tied to the company's financial performance. And given the highly volatile nature of the energy sector, it shouldn't be too shocking to know that Devon's dividends can be pretty volatile, too. So, if dividend consistency is important to you, you should skip on by this company.
DVN Dividend Per Share (Quarterly) data by YCharts
But that doesn't mean that Devon Energy is bad for all investors. In fact, if you step back and think about Devon's dividend a little, it might actually be a unique opportunity to hedge your real-world energy costs. For example, when oil and natural gas are expensive, you will have to pay more to fill your gas tank and heat your home. But at the very same time, those high energy prices are likely to be boosting Devon Energy's earnings, too. That, with a little lag, will probably result in a higher dividend payment. The extra income you collect from the dividend can help offset the strain on your budget from higher energy costs.
Perhaps that dividend dynamic doesn't make sense as a core energy holding, but it certainly could add value to a more diversified income portfolio as a hedge against energy price inflation. The caveat is that you have to be prepared for the inevitable dividend cuts that will come when energy prices decline. Also, the dividend yield, which is roughly 6.7% today, isn't a particularly good gauge of the income the stock will generate over time.
A three-tiered capital return program
Matt DiLallo (ConocoPhillips): Many energy companies have unveiled unique ways to return additional cash to investors in recent years. They wanted to maintain flexibility to adjust to market conditions while still being able to reward investors.
ConocoPhillips initiated its three-tier return of capital program in late 2021. That program features a fixed base quarterly dividend the company aims to increase each year, a quarterly variable return of cash (VROC) payment, and share repurchases. The company wanted to offer investors a reliable cash return (the base dividend) while remaining flexible to return additional cash to shareholders based on its free cash flow and business needs.
The oil company typically sets a capital return target early each year and adjusts it based on commodity prices. For example, its initial target for 2022 was to return $7 billion. However, it ultimately returned $15 billion because of strong oil prices. Meanwhile, the company set a goal to return $11 billion last year, which it achieved.
For 2024, ConocoPhillips plans to return $9 billion to shareholders. The base return will come from its quarterly dividend of $0.58 per share, which it increased by 14% in November. On top of that, the company plans to make a $0.20 per share VROC payment in the first quarter. That VROC payment, as the name implies, could vary in future quarters. It has been as high as $1.40 per share and as low as $0.20 per share since the company initiated the additional payment in 2021. ConocoPhillips also plans to repurchase shares (it bought back $5.4 billion of stock in 2023 while paying $5.6 billion via dividends and VROC).
ConocoPhillips provides investors with a solid income floor from its fixed quarterly dividend and income upside potential from its VROC. While the variability of that secondary payment isn't for everyone, it enables investors to collect some extra cash when crude prices are higher.
A steady dividend growth stock
Neha Chamaria (Brookfield Renewable): Brookfield Renewable is an attractive dividend stock from the energy patch right now for three reasons. First, it's a bet on renewable energy, the demand for which should only rise in the coming decades as more countries push to reduce carbon emissions. Second, Brookfield Renewable grows its dividend regularly, which has, so far, meant fatter dividend checks for income investors every year. Third and most importantly, Brookfield Renewable sees ample growth opportunities ahead to power its dividends.
Although Brookfield Renewable's shares have fallen steadily over the past year or so, the company generated record funds from operations (FFO) per unit in 2023 despite facing challenges like high interest rates. It added nearly 5 gigawatts (GW) of capacity last year, and its total development pipeline of more than 130 GW as of the end of 2023 was up nearly 80% from the previous year.
That development pipeline, when topped with acquisitions, should be able to drive Brookfield Renewable's FFO and dividend per unit even higher in the coming years. The company has a strong record so far, having grown its FFO and dividend per share by compound annual growth rates of 10% and 6%, respectively, between 2012 and 2023.
Brookfield Renewable now expects to deploy nearly $7 billion to $8 billion over the next five years, which should set the ball rolling for a targeted annual FFO per unit growth of 10% pace through 2028. That should be able to support 5% to 9% annual dividend growth, which, when combined with a dividend yield of 5% or more, could fetch Brookfield Renewable shareholders double-digit total annual returns.
